PDI Seoul Forum: Three takeaways from Korean LPs

Investors remain devoted to direct lending, though at least one said it may be time to explore special situations, delegates heard at PDI’s inaugural forum in Seoul.

There has been significant growth in private debt investing in Asia in recent years, particularly in South Korea. Below are some of the top takeaways from PDI’s inaugural Seoul Forum on what credit managers should know when approaching Korean investors.

LPs shy away from investing at home

Most of the commitments have gone to US and European direct lending strategies, with few targeting Asia-focused credit funds. Korean LPs have backed other Asia-focused private market funds, one attendee said, noting that one of the large US asset managers received a positive response from the nation’s LPs for its latest Asia real estate vehicle.

The Asian private credit market, as one delegate explained, is often bifurcated into developing and developed economies, with many falling into the former category, which have less-stable legal structures that don’t always guarantee creditors’ rights will be consistently enforced, regardless of the situation.

Another Korean insurance investor said outbound investments are preferred because South Korean LPs are dealing with a domestic economy that has low interest rates and low growth.

If you’re a European direct lender, life is good

Korean investors’ interest in direct lending has burgeoned over the last several years, with much of it going to the US, but currency hedging costs are bringing Europe into focus. When making US dollar-denominated commitments, hedging costs have been a deterrent because they shave 1.5 percentage points off the net returns, said Janghwan Lee, head of the alternative investment management team at Lotte Non-Life Insurance Company.

Senior debt-focused credit managers have received a warm welcome from Korean LPs as well, given the inherent downside protection being at the top of the capital structure provides, one delegate said. Commitments have largely remained in senior debt and junior debt, with relatively little attention given to distressed debt and niche strategies.

However, as another insurance investor noted, as interest rates continue to rise the question is whether the asset class will remain attractive in such in an environment, and whether the illiquidity premium is worth it.

‘Safety first’ is the motto of LPs

One of the key things Lotte Non-Life Insurance looks at when considering an investment in a general partner, Lee said, is the firm’s historical default rate among its portfolio companies and, specifically, what were the recoveries in those situations.

A third concern is whether the GP has a separate, dedicated workout team from the personnel group that originated and managed the deal, Lee explained, adding that he prefers it if the firm has a separate restructuring team.

If an LP expects an 8 percent net return – the upper end of what Korean investors expect for unlevered senior debt according to one panelist – there are no guarantees that the manager will be able to deliver that number, no matter how great the firm’s historical track record may be.

Korean investors often favour larger funds, with one person who places capital saying that often the size of the funds targeted by Korean investors are $1 billion and above. Meanwhile, another attendee noted that Korean investors don’t like to be the largest single investor in a fund.